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Coal India Q1 result: Ain’t no sunshine here

LiveMint logoLiveMint 16-08-2017 Pallavi Pengonda

The country’s largest coal producer Coal India Ltd’s (CIL’s) June quarter (first quarter or Q1) financial results are uninspiring, especially coming after a disappointing March quarter. Sure, June quarter profits were expected to fall, but the net profit, lower 23% year-on-year at Rs2,352 crore, missed many analysts’ estimates.

A key disappointment was that average realization of coal sold through the fuel supply agreement (FSA) route fell 3% year-on-year while sales volume contracted marginally. Analysts were expecting some recovery in FSA realizations but that hasn’t come through. On the other hand, while coal sold through the e-auction route increased by a third compared to last year’s quarter, realizations increased just 1%. As a result, CIL’s consolidated revenue (excluding excise duty) increased 3.8%, slower than the 8.3% growth seen in the March quarter, to about Rs19,162 crore.

Employee costs included an ad hoc provision but were broadly in line with expectations. Even so, the company’s earnings before interest, tax, depreciation and amortization fell 18%, as operating costs increased at a relatively faster pace than revenue growth.

The silver lining in the CIL story is that most of the pessimism appears to be factored into the share price. Its shares have materially underperformed the benchmark Sensex so far this fiscal year (FY18). Currently, the stock trades at 12.7 times estimated earnings for this year.

For valuations to expand, much depends on an increase in the offtake (or sales volume). Over April-July, CIL fell short of its guidance, achieving around 94% of its target. Needless to say, growth has to be much faster from hereon if the full-year target of 600 million tonnes (mt) has to be met. That’s a big task.

For perspective: for FY18, Nomura Research forecast production/offtake at 577.3mt/575.4mt, which implies 4.2%/5.9% year-on-year growth over FY17 actual production/offtake. “In this context, 4MFY18 reported output (production down 4.3% y-y, offtake up 4% y-y) appear weak,” said Nomura in a report on 2 August. The implied run-rate in the next eight months to meet Nomura’s FY18 production/offtake forecast is 1.74mt/1.62mt, implying a year-on-year growth of 7.7%/ 6.8%, respectively.

Investors would do well to watch those numbers and how demand from the power sector shapes up in the coming days. Higher volume growth will offer the company some cushion against high employee costs, which account for a massive proportion of total operating costs. A price hike, if it happens, will help. Lack of price hikes and subdued volumes at a time when profits are falling may adversely impact CIL’s future dividend payouts. In short, while valuations are comfortable, the road ahead is rocky.

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